Having a new home built has become a popular for buyers who can't find exactly what they're looking for on the pre-owned market, or because they figure that everything is new and so they won't have to worry about maintenance or repairs for quite some time. But, all too often, problems arise: the house wasn't "built right," or it's missing some things, like certain faucet handles.

If you're in the market for buying or selling a newly constructed home, you should know some things about how you can avoid some of the special problems that can come with such a home and how you can protect your rights.

The Sales/Construction Contract

When there's a contract for a new house to be built by the seller-builder, both parties should insist that the contract contain several things that will help reduce the risk of post-construction problems and lawsuits. For example, it should contain:

  • Detailed plans and specifications of the work so that the builder's tasks and duties are clear
  • The right for the buyer to give the builder a ''punch list'' of discoverable defects and omissions (like cracked walls and missing light fixtures) within a reasonable period of time after taking possession, like 10 days, for instance, with the seller-builder having a reasonable time to fix the problems, like 30 days
  • A guaranty from the seller that all work, nonstructural as well as structural, will to be free of defects for at least one year, or provide a warranty or insurance program
  • Protecting the buyer's down payment from the seller-builder's (or the buyer's) financial problems, such as having the down payment placed in escrow
  • A detailed list and description, together with manufacturer names and styles, of things like faucets, countertops, door knobs, cabinetry, and flooring, and other components and fixtures, that are to be installed in the home

Defects and Warranties

Some state laws, and almost all courts, recognize an "implied warranty of habitability and fitness for use," which makes the builder-seller responsible for construction defects in the home that are not readily apparent to the buyer when performing a normal inspection. The warranty doesn't require the seller to build a perfect home, but one that is not below the standard that the buyer reasonably expects.

Usually, the warranty covers:

  • Reasonable workmanship, which requires that the home conform to the standards of construction normally met in the locality in which the home was built and, in most cases, is concerned with structural defects
  • Fitness for habitation, which requires suitability for living purposes, and usually relates to the useful occupancy of the house or things that make the house unsafe for occupancy

Some examples of defects that amount to a breach, or violation, of this warranty include sagging ceilings, cracked walls and foundations, a leaking roof, and faulty electrical wiring.

If a buyer tells the builder-seller of a breach of the warranty and the builder refuses to fix the defect, the buyer has several remedies, such as:

  • Rescission, or cancellation of the contract for sale, but this remedy usually is available only where the defects in the house are substantial and would require major effort and significant funds to repair
  • An award of money damages, which is the most common form of relief asked for in lawsuits involving a breach of the implied warranty of habitability, with such damages typically measured in two ways: (1) the lowered market value of the property as a result of defects, and; (2) the cost to repair the defects

Homeowners Warranty Plans

One way for both the buyer and seller-builder to protect themselves from having to pay for maintenance and repairs in the new home is to buy a "homeowner's warranty" or "new home warranty," or to enroll in a warranty program. Essentially, it's a long-term home warranty that covers defects and repairs in most aspects of a new home, covering everything from a leaky roof to defects in floor finishes, during the warranty period.

In some states, new home builders are required to enroll either in a state-run warranty program or a private program that is state-approved. Typically in these programs, the builder-seller pays a registration fee and yearly membership fee, and then a premium for each house built. These payments are then added into the sales price of the house.

In almost all states, the buyer and the seller have an option to pay for a home warranty from a private company. The parties can negotiate who pays for the warranty, but if the builder-seller agrees to provide it, the cost is usually added back into the sales price.

The warranties vary from state to state and from company to company, but in general they work like this:

  • A two-year warranty against defects in electrical, plumbing, heating and cooling systems, as well as cosmetic features like floor finishes and carpeting, and seals in windows in doors, that arise from the builder-seller's failure to follow approved building or installation standards, which are defined in the warranty itself
  • A ten-year warranty on "major structural defects," such as cracks and leakage in the foundation, sagging steel support beams, and sagging roof supports, again that arise from the builder-seller's failure to follow approved building standards

Under some new home warranties, the builder-seller has the responsibility to make repairs during the first one to two years of the warranty period, with the warranty company taking responsibility for the remaining eight years. In other warranties, the builder is required to make repairs for the full 10 years. Be certain to read the warranty carefully, or seek the advice of an attorney with experience in real estate law, before you buy it or agree to it.

Questions for Your Attorney

  • I don't have a home warranty, my builder-seller has tried to fix my leaking roof three times, it's still not fixed right, and he refuses to "fix" it again? What are my options?
  • If I buy a new home warranty for my house, is the cost tax deductible, like mortgage interest or property taxes?
  • My builder and warranty company both say that the cracks in my basement walls are not covered by the warranty. Can I do anything to get them to fix the cracks?
  • Can I refuse to pay a portion of the purchase price until the builder-seller fixes everything on my "punch-list" of items needing attention?

Tagged as: Real Estate, Residential Real Estate, new home, new problems